Senior Citizens & Bankruptcy

When inflation and health care costs rise, it's not uncommon for elderly Americans to seek bankruptcy relief. And while senior citizens enjoy certain advantages over other debtors, filing for bankruptcy won't be the right choice for those who stand to lose a lot of property. Read on to find out about other common issues affecting senior citizens in bankruptcy.

Is a Bankruptcy Filing Necessary?

Filing for bankruptcy can be an easy way to wipe out debt and maximize the money available to pay monthly bills. However, many seniors don't feel comfortable filing for bankruptcy, and it isn't always necessary or even a good idea. Here are two situations that make filing for bankruptcy of questionable value for seniors:

You don't have anything a creditor can take. Creditors aren't allowed to take the things needed to maintain a home, such as household goods, a modest car, Social Security funds, and many retirement accounts. When these things make up all of what the senior owns, and the senior isn't at risk of losing property or money, the senior is "judgment proof," making filing for bankruptcy unnecessary. However, some judgment-proof individuals will file for bankruptcy to stop creditor calls even when this is the case.

You have too many assets to benefit from bankruptcy. When you own property and income that isn't protected from creditors, filing for bankruptcy might not be a good idea. Chances are you'd lose the property in Chapter 7. In Chapter 13, you'd have to make a high Chapter 13 repayment plan payment because you must pay for any property you're not entitled to protect (but you can keep it).

Learn about the differences between Chapters 7 and 13 and how debtors can lose money from a bank account with a bank account levy.

When Does Bankruptcy Make Sense for a Senior?

Even though bankruptcy isn't always necessary or beneficial, it can work for some seniors. Here are a few things to ask yourself:

• Do you have the type of debt that can be wiped out (discharged) in Chapter 7?
• Do you want to catch up on home or car arrearages through a Chapter 13 repayment plan?
• Can you exempt (protect) all or most of your property?
• If you have to give up or pay for some property, will you discharge (erase) enough debt to make filing worthwhile?
• Is your income low enough to pass the Chapter 7 means test, or will you be required to make monthly payments in Chapter 13?

Additional issues seniors will want to consider include:

• Discharging medical debt and credit card bills. These are two of the easiest types of debt to discharge in bankruptcy. In fact, filing for Chapter 7 bankruptcy can wipe out qualifying debt in a few months. But remember, if you're judgment proof, the creditor likely won't be able to collect for these bills anyway.
• Protecting home equity can be problematic. Many seniors have significant equity in their homes. The homestead exemption protects a certain amount of equity, but the amount varies depending on the state's laws. In Chapter 7, the trustee will take nonexempt property (including home equity) to pay creditors.
• Protecting retirement accounts. Under federal bankruptcy law, almost all tax-exempt retirement accounts, including 401(k)s, 403(b)s, profit-sharing, and defined-benefit plans, are exempt in bankruptcy. IRAs and Roth IRAs are also protected up to a particular amount. You'll want to check with a bankruptcy attorney to ensure your retirement qualifies for protection. (To learn more, including the current IRA limits, see Your Retirement Plan in Bankruptcy.)
• Protecting Social Security benefits. Your creditors can't take your Social Security benefits outside of bankruptcy, and they're exempt (you can keep them) in bankruptcy, but only if the funds remain in a separate account. Once commingled with other funds, they lose protection. Also, your Social Security benefits aren't counted as income for qualification purposes when taking the bankruptcy means test. But your Social Security income must be disclosed in your bankruptcy budget, and might still be used to disqualify you if your budget shows a significant amount of disposable income each month. To learn more, see Is Social Security Income Counted in the Chapter 7 Means Test?
• Retirement funds aren't protected once withdrawn. Withdrawing money from your retirement account can be tricky. Bankruptcy treats your retirement withdrawals as income for qualification purposes. Withdrawn retirement funds are also difficult to protect in and out of bankruptcy once they lose their protected status because most states don't provide much of an exemption for cash. Remember, if you comingle protected funds in an account with unprotected funds, the funds will lose the protected status because it becomes impossible to trace which funds are exempt. The best practices are not to withdraw protected retirement funds, when possible, and to keep Social Security funds in a separate account.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. For instance, Nolo articles will explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.